The Tax Shack Inc

Income Tax and Accounting Tips and Info

Lose the Mentality – TAX REFUNDS ARE NOT FREE GOVERNMENT MONEY!

Posted by Tara Hendrickson on February 4, 2014

A lot of people have gotten the wrong idea about tax refunds.  It’s not your fault.  I blame the media.  Why not?!  We blame the media for everything else.  You do see it on television and in the papers quite a bit.  “We’ll get you more money back!”  “Make sure you get the most out of your refund.”  More money, more money, more money.  This is a problem!

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It’s a problem because people come to expect a refund no matter what.  It’s a problem because people aren’t taught to understand what a refund really is and how it really works.  It’s a problem because when you expect to get a refund, you don’t bother to think about tax consequences and by the time I get your tax return, it’s too late!  I can’t help you get a refund that doesn’t exist. 

 

So I would like to try to correct this problem right now and reprogram your thinking on what a tax refund really is because one thing it most certainly not is “free money.”

It’s a REFUND!  Picture it like this.  You are at the grocery store.  The clerk rings up $80 worth of groceries.  You give them a $100 bill.  They REFUND you $20.  Taxes work the same way my friends!

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Your employer pays you money.  They are required to estimate how much tax you owe to the US Treasury based on your earnings.  They withhold this estimated amount from your paycheck and pay it to the government.  You file your taxes at the end of the year and if you paid too much, you are given a REFUND.

That’s right!  You are being given back your own money!  Money that you overpaid!  Money that the government has sat on all year without paying you a dime in interest.

Okay, some of you are saying, “I already knew this.  What are you getting at?”  Fair enough.  Here’s the lowdown -

YOUR TAX SITUATION CHANGES YEARLY!!!!!!  That’s right!  You might become accustomed to getting that $2000 refund every year.  Then you sell your house and start renting.  No more itemized deductions.  Your refund drops.  Your kid moves out of the house.  No more dependent.  Your refund drops.  You get married and your combined income puts you into a higher tax bracket.  Your refund drops.  You finally get to retire after decades of hard work, but you don’t claim the same withholding on your pension that you did on your wages.  Your refund drops.  Are you starting to see a pattern?

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I can hear your thoughts now.  “Why do I need a tax preparer if there is only a certain amount of money I am supposed to get based on my income?”  Here’s what we do:

We are educated on all of the different deductions available to you and we make sure we maximize your refund by seeing that you get everything you qualify for and we can help you plan and prepare for taxes when you tell us about your life and when your life situations change.  We also help you plan and prepare for when the tax laws change.

What we don’t do is pull numbers out of thin air to get a you a magic refund that is free money from the government.  Sorry guys.

Here is my advice to you.  When you fill out your W-4 to claim how much withholding you want, think of it as one of two possibilities:  1.  Claiming extra withholding that goes into a forced savings account (that does not pay interest) until you file your taxes at the end of the year OR  2.  Trying to break even at the end of the year by getting as much of your money as possible paid to you in your paychecks all year long.  Those are really your two options and either way is fine as long as you are aware of what you are doing with your money.

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Per Diem – The Controversial Deduction

Posted by Tara Hendrickson on January 17, 2014

The story of a sweet deduction that becomes involved in scandal and deception and eventually ends with heartbreak and legal battles.  It sounds like the plot for what could be this year’s break out film!  Alas, it is the tale of a tax deduction gone awry.

New clients walk in and say things like:  “I want the Fireman deduction!”  “I want the Merchant Seaman deduction!”  “I want the Pilot deduction!”  These are just a few of the examples.

Is there actually such a thing?  No.  What are they referring to then?  Per Diem!  Do they qualify for it?  Usually no, but sometimes yes.

So what’s the big deal with this Per Diem stuff?  Why is it so controversial? 

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Per Diem, meaning “per day”, is a type of deduction that is allowed by the IRS for meal and incidental expenses while traveling for work.  Depending on your job, how you are paid, if you are reimbursed, how you travel, and where you travel, you may be able to deduct a standard amount per day for your meals and incidentals.  Sounds awesome, right?  Sounds easy enough and harmless enough.

Here’s how it all goes sour.  If you are going to take a deduction for per diem, you have to be able to substantiate the fact that you had actual out of pocket expenses.  So if you were traveling for work and you had to pay for food, then you could take the higher of your actual cost or what the IRS allows as a standard meal expense for the location you are at.  Even if you take this standard amount, it is still subject to the 50% limitation for meals and entertainment expenses (unless you qualify for special treatment under Department of Transportation rules).  If you are reimbursed by your employer for meals, you must also subtract the amount of the reimbursement from the expense, regardless if it is your actual cost or the standard amount, and only take the difference.

Part of the reason this deduction is so scandalous is because preparers and individuals doing their own taxes try to take 100% of the costs and try to not claim reimbursements!  Gee whiz!

There have been a lot of court cases, especially involving merchant seaman, with regards to Per Diem.  Many times on ships, the employer is required to provide the food to the people working on the ship.  Merchant seaman per diem scams were on the IRS Dirty Dozen for many years because it was common in that industry to try to take the per diem amount even though the employees had no out-of-pocket expenses for food!  If you do a google search, you can see that there were preparers who were actually served court injunctions preventing them from preparing returns for merchant mariners.

So here is the real skinny on Per Diem and travel expenses as I see them.  It doesn’t matter what your industry is, if you don’t have an actual expense where you had to pay out-of-pocket for something, then you don’t have a deduction.  I am happy to take per diem for clients, but they need to be able to substantiate to me that they qualify!  So keep travel logs, keep your receipts for food, lodging, and incidentals.  You’d be surprised how often it’s actually better to take your out-of-pocket expenses than it is to take the federal standard anyway!  If you have your receipts, you can do whatever is best for your situation.

Is this starting to sound a bit familiar to you?  That’s because you have to do the same thing when you take mileage for work!  You have to keep a log and you have to substantiate your actual out-of-pocket receipts.  I hate to break it to you guys, but you just can’t get out of keeping track of expenses if you want to take deductions!  There’s just no way around it.

Be sure to check out our web site for handy dandy information and helpful checklists!  I have put links below for you.

Additional Links:

Tax Shack Checklist for Employees

Tax Shack Checklist for Business Expenses

Tax Shack Checklist for Merchant Seamen and Per Diem Worksheet

Tax Shack Per Diem Worksheet for other industries

IRS Publication 463 – Travel Entertainment, Gift and Car Expenses

IRS Tax Topic 511 – Business Travel Expenses

Tax Shack YouTube Channel

Other Tax Shack Blog and Vlog Posts you might find interesting:

Can I deduct my vacation as a business trip?

Tax Chat: The New Simplified Home Office Deduction

Home Office Deductions

Tips on making Estimated Tax Payments

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Can I Deduct My Vacation As A Business Trip?

Posted by Tara Hendrickson on July 19, 2013

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I am often asked by small business owners about which travel expenses can be deducted for business.  Typically, the question goes something like this:

“I went to California with my family, but while I was there I attended a couple classes and handed out my business card to people everywhere we went.  Can I write off my trip?”

I hate to be the bearer of bad news, but I’m just going to say it….NO!  Honestly, does that sound like something the IRS would let you write off?  I mean, let’s just be straight here.  Do you really think taking your kids to Disneyland is a tax deduction for entertainment?  Don’t get me wrong, I’d love to write off my vacations too!  In fact, my husband always wants me to save receipts from when we visit my parents out of state.  They work for me part of the year and he thinks if we go visit them, it’s a business trip.  Wrong hubby!  (Shaking my head.)

There are guidelines for deducting travel expenses.  Depending on the purpose of the trip and what you do while you are out of town, you MAY be able to write off some of your costs.  Let’s break it down -

Be honest with yourself.  What is the primary purpose of the trip?  Is it to meet with a new supplier?  To meet with realtors and scout locations for a second office?  To attend a national conference in your industry?  To visit Mom and Dad?  To go to an amusement park?  To have a romantic weekend?  A good rule of thumb is to take into consideration that if the trip is primarily for business, you will be able to document that purpose.  Examples:  1. Meeting with a new supplier – you might take pictures of products, pick up catalogs, get estimates, etc.  2.  Scouting locations for a second office – you will have paperwork on the different locations you looked at, maps of the area, estimates on cost, and most likely a packet of paperwork from the realtor  3.  Attending a national industry conference – You will have a name badge, a receipt for the cost of the conference, brochures and information from speakers and vendors at the conference, etc.

If the primary purpose of the trip is for business and that is what you spend the majority of your time doing, then you will be able to write off your transportation, lodging, meals, etc.  You CANNOT write off any of the costs for your family to travel with you.  You also cannot deduct the cost of lodging for any days  that you remain on vacation after the primary business purpose has been served.

 MH900442499What if the primary purpose is recreation, but you happen to do some business while traveling?  You might still have some deductions, but they will not include airfare or lodging.  If you attend classes, you can deduct the fees of those.  If you hand out business cards, samples, or gifts to drum up business, you could write off those.  If you meet with potential clients, vendors, networking peers, etc. for a meal to discuss business, you could write off the meal.

So in the future, when determining if you can write off your vacation, ask yourself what the primary purpose of the trip was and what kind of documentation do you have to back it up.

For questions, contact us on our web site.  Be sure to follow us on Facebook for more frequent tips and information.  And for fun and informative videos, subscribe to our channel on YouTube!

Additional Links:

IRS Publication 463 – Travel, Entertainment, Gift and Car Expenses

IRS Tax Topic 511 – Business Travel Expenses

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We are starting a Vlog on YouTube!

Posted by Tara Hendrickson on June 19, 2013

We are going to start a weekly Vlog on YouTube…Tax Chat with the Tax Chat!

I encourage you to send me your questions on YouTube or by email so that I can do Vlogs about them!

Tax Shack on YouTube

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IRS Offers Tips for Taxpayers Who Missed the Tax Deadline

Posted by Tara Hendrickson on April 17, 2013

The IRS has some advice for taxpayers who missed the tax filing deadline.

  • File as soon as possible.  If you owe federal income tax, you should file and pay as soon as you can to minimize any penalty and interest charges. There is no penalty for filing a late return if you are due a refund.
  • Penalties and interest may be due.  If you missed the April 15 deadline, you may have to pay penalties and interest. The IRS may charge penalties for late filing and for late payment. The law generally does not allow a waiver of interest charges. However, the IRS will consider a reduction of these penalties if you can show a reasonable cause for being late.
  • E-file is your best option.  IRS e-file programs are available through Oct. 15. E-file is the easiest, safest and most accurate way to file. With e-file, you will receive confirmation that the IRS has received your tax return. If you e-file and are due a refund, the IRS will normally issue it within 21 days.
  • Pay as much as you can.  If you owe tax but can’t pay it all at once, you should pay as much as you can when you file your tax return. Pay the remaining balance due as soon as possible to minimize penalties and interest charges.
  • Installment Agreements are available.  If you need more time to pay your federal income taxes, you can request a payment agreement with the IRS. Apply online using the IRS Online Payment Agreement Application tool or file Form 9465, Installment Agreement Request.
  • Refunds may be waiting.  If you’re due a refund, you should file as soon as possible to get it. Even if you are not required to file, you may be entitled to a refund. This could apply if you had taxes withheld from your wages, or you qualify for certain tax credits. If you don’t file your return within three years, you could forfeit your right to the refund.

For more information, visit IRS.gov.

tax-deadline

 

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Six Tips on Making Estimated Tax Payments

Posted by Tara Hendrickson on April 10, 2013

Some taxpayers may need to make estimated tax payments during the year. The type of income you receive determines whether you must pay estimated taxes. Here are six tips from the IRS about making estimated tax payments.

1. If you do not have taxes withheld from your income, you may need to make estimated tax payments. This may apply if you have income such as self-employment, interest, dividends or capital gains. It could also apply if you do not have enough taxes withheld from your wages. If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.

2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return. Other rules apply, and special rules apply to farmers and fishermen.

3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year. You should also include any tax deductions and credits that you will be eligible to claim. Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes. Try to make your estimates as accurate as possible.

4. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.

5. You should use Form 1040-ES, Estimated Tax for Individuals, to figure your estimated tax.

6. You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. You’ll find more information about your payment options in the Form 1040-ES instructions. Also, check out the Electronic Payment Options Home Page at IRS.gov. If you mail your payments to the IRS, you should use the payment vouchers that come with Form 1040-ES.

For more information about estimated taxes, see Publication 505, Tax Withholding and Estimated Tax. Forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional Links:

IRS Publication 505, Tax Withholding and Estimated Tax

Electronic Payments Home Page

Form 1040-ES, Estimated Tax for Individuals

Using Electronic Funds Transfers With Your Return

Tips for Individuals Who Owe the IRS

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Nine Tips on Deducting Charitable Contributions

Posted by Tara Hendrickson on April 3, 2013

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Giving to charity may make you feel good and help you lower your tax bill. The IRS offers these nine tips to help ensure your contributions pay off on your tax return.

1. If you want a tax deduction, you must donate to a qualified charitable organization. You cannot deduct contributions you make to either an individual, a political organization or a political candidate

2. You must file Form 1040 and itemize your deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must also file Form 8283, Noncash Charitable Contributions, with your tax return.

3. If you receive a benefit of some kind in return for your contribution, you can only deduct the amount that exceeds the fair market value of the benefit you received. Examples of benefits you may receive in return for your contribution include merchandise, tickets to an event or other goods and services.

4. Donations of stock or other non-cash property are usually valued at fair market value. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

5. Fair market value is generally the price at which someone can sell the property.

6. You must have a written record about your donation in order to deduct any cash gift, regardless of the amount. Cash contributions include those made by check or other monetary methods. That written record can be a written statement from the organization, a bank record or a payroll deduction record that substantiates your donation. That documentation should include the name of the organization, the date and amount of the contribution. A telephone bill meets this requirement for text donations if it shows this same information.

7. To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.

8. You may use the same document to meet the requirement for a written statement for cash gifts and the requirement for a written acknowledgement for contributions of $250 or more.

9. If you donate one item or a group of similar items that are valued at more than $5,000, you must also complete Section B of Form 8283. This section generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, see Publication 526, Charitable Contributions. For information about noncash contributions, see Publication 561, Determining the Value of Donated Property. Forms and publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional Links:

Publication 526, Charitable Contributions

Publication 561, Determine the Value of Donated Property

Common Misconceptions About Deductions

Itemized vs. Standard Deductions

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Ten Things To Know About Farm Income And Deductions

Posted by Tara Hendrickson on March 26, 2013

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If you earn money managing or working on a farm, you are in the farming business. Farms include plantations, ranches, ranges and orchards. Farmers may raise livestock, poultry or fish, or grow fruits or vegetables. Here are 10 things about farm income and expenses that the IRS wants you to know.

1. Crop insurance proceeds.  Insurance payments from crop damage count as income. They should generally be reported the year they are received.

2. Deductible farm expenses.  Farmers can deduct ordinary and necessary expenses as business expenses. An ordinary farming expense is one that is common and accepted in the farming business. A necessary expense is one that is appropriate for that business.

3. Employees and hired help.  You can deduct reasonable wages you paid to your farm’s full and part-time workers. You must withhold Social Security, Medicare and income taxes from your employees’ wages.

4. Items purchased for resale.  If you purchased livestock and other items for resale, you may be able to deduct their cost in the year of the sale. This includes freight charges for transporting livestock to your farm.

5. Repayment of loans. You can only deduct the interest you paid on a loan if the loan proceeds are used for your farming business. You cannot deduct interest on a loan used for personal expenses.

6. Weather-related sales.  Bad weather may force you to sell more livestock or poultry than you normally would. If so, you may be able to postpone reporting a gain from the sale of the additional animals.

7. Net operating losses.  If deductible expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.

8. Farm income averaging.  You may be able to average some or all of the current year’s farm income by spreading it out over the past three years. This may lower your taxes if your farm income is high in the current year and low in one or more of the past three years. This method does not change your prior year tax. It only uses the prior year information to figure your current year tax.

9. Fuel and road use.  You may be able to claim a tax credit or refund of federal excise taxes on fuel used on your farm for farm work.

10. Farmers Tax Guide.  More information about farm income and deductions is in Publication 225, Farmer’s Tax Guide. You can download it at IRS.gov, or call the IRS at 800-TAX-FORM (800-829-3676) to have it mailed to you.

Additional Links:

Tax Shack Checklist for Farmers

Publication 225, Farmer’s Tax Guide

Home Office Deduction

Four Things You Should Know If You Barter

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Tax Rules for Children Who Have Investment Income

Posted by Tara Hendrickson on March 25, 2013

Some children receive investment income and are required to file a federal tax return. If a child cannot file his or her own tax return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on the child’s behalf.

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There are special tax rules that affect how parents report a child’s investment income. Some parents can include their child’s investment income on their tax return. Other children may have to file their own tax return.

Here are four facts from the IRS about the taxability of your child’s investment income.

1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

2. Special rules apply if your child’s total investment income is more than $1,900. The parent’s tax rate may apply to part of that income instead of the child’s tax rate.

3. If your child’s total interest and dividend income is less than $9,500, you may be able to include the income on your tax return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends. If you make this choice, the child does not file a return.

4. Your child must file their own tax return if they received investment income of $9,500 or more. File Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, with the child’s federal tax return.

For more information on this topic, see Publication 929, Tax Rules for Children and Dependents. This booklet and Forms 8615 and 8814 are available at IRS.gov. You may also have them mailed to you by calling 800-TAX-FORM (800-829-3676).

Additional Links:

Publication 929, Tax Rules for Children and Dependents

Ten Facts About Capital Gains and Losses

Taxable and Nontaxable Income

Who Should File a 2012 Tax Return?

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Itemizing vs Standard Deductions: Six Facts to Help You Choose

Posted by Tara Hendrickson on March 22, 2013

When you file a tax return, you usually have a choice to make: whether to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.

The IRS offers these six facts to help you choose.

1. Figure your itemized deductions.  Add up the cost of items you paid for during the year that you might be able to deduct. Expenses could include home mortgage interest, state income taxes or sales taxes (but not both), real estate and personal property taxes, and gifts to charities. They may also include large casualty or theft losses or large medical and dental expenses that insurance did not cover. Unreimbursed employee business expenses may also be deductible.

2. Know your standard deduction.  If you do not itemize, your basic standard deduction amount depends on your filing status. For 2012, the basic amounts are:

• Single = $5,950
• Married Filing Jointly  = $11,900
• Head of Household = $8,700
• Married Filing Separately = $5,950
• Qualifying Widow(er) = $11,900

3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return. To figure your standard deduction in these cases, use the worksheet in the instructions for Form 1040, U.S. Individual Income Tax Return.

4. Check for the exceptions.  Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions. See the Form 1040 instructions for the rules about who may not claim a standard deduction.

5. Choose the best method.  Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.

6. File the right forms.  To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on  Forms 1040, 1040A or 1040EZ.

For more information about allowable deductions, see Publication 17, Your Federal Income Tax, and the instructions for Schedule A. Tax forms and publications are available on the IRS website at IRS.gov  You may also call 800-TAX-FORM (800-829-3676) to order them by mail.

Additional Links:

Interactive Tax Assistant Tool

IRS Publication 17, Your Federal Income Tax

Common Misconceptions About Deductions

Seven Important Facts About Medical and Dental Expenses

Determining Your Correct Filing Status

 

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